Joe Biden’s USD 1.9 trillion stimulus package will further boost Chinese exports to the US, but a stronger dollar could also increase costs for commodities and foreign investment in China, writes Torsten Weller.
US President Joe Biden has achieved his first major legislative success, after signing a huge USD 1.9 trillion stimulus package into law on 11 March. The bill includes direct payments of up to USD 1,400 to American households, giving a big boost to their disposable income. The Biden Administration has since also published a USD 2 trillion infrastructure programme, which – if passed – would further pump the US economy.
For China, this US spending spree is generally positive, but it also poses new challenges. On the plus side, Chinese exporters will benefit from increasing demand from US customers. Last year’s CARES Act, which injected USD 2.3 trillion into the US economy, also helped boost imports from China. Despite punitive tariffs now imposed on over 66% of Chinese imports, goods shipments from China into the US were 20% higher in the last quarter of 2020 than in the same period in 2019. China remains the US’s largest source of foreign products, with nearly 19% of all goods imports coming from the country.
Yet while a booming US economy will likely drive Chinese imports higher again this year, it will also put upward pressure on the dollar. This could increase capital costs for Chinese businesses and make dollar-denominated imports – especially commodities – more expensive.
The knock-on effect of the US stimulus will in turn pose broader questions about China’s economic reform strategy. A persistently strong export sector coupled with more expensive imports could force Chinese leaders into a rethink of their plan to shift the economy towards a consumption-driven growth model. It could also force China’s central bank, the People’s Bank of China, to speed up the liberalisation of the renminbi.
Read the full analysis here.
